Q2 2022 Clear Secure Inc Earnings Call
Good morning, and welcome to the clear second quarter 2022 earnings Conference call. We have us here with US today, Mr. Charron, Seidman Becker co founder Chairman and Chief Executive Officer, Ken Cornick, Cofounder, President and COO.
<unk> financial officer.
Please be advised that today's conference is being recorded.
I would also like to remind you that today's discussion will contain forward looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections and our most recent S. G SEC filings in.
In addition, we've included some non-GAAP financial measures in our discussion reconciliations to the most directly comparable GAAP financial measures can be found in today's 8-K with that I'll turn the call over to Taryn Seidman Becker co founder Chairman and Chief Executive Officer Karen.
Hello, and welcome to our second quarter 2022 earnings call we.
We were certainly expecting a very busy summer travel season, which we actually are have had termed travel palooza needless to say the global secular demand for travel combined with the significant industry challenges have all exceeded our already high expectations.
This travel environment has highlighted the imperative for future facing innovation and collaboration amongst all stakeholders to ensure travelers have the frictionless experience they rightfully deserve and enjoy and so many others setting we are laser focused and deeply committed to accelerating our network expansion part.
Her shifts and innovation around new product to help travelers navigate an increasingly difficult global travel environment.
We are clear spend each day, envisioning and creating safer and easier travel experiences when we say transforming the journey from home to gate, we mean it from stepping out of your front door to reaching your final destination. It is just too hard today mirrors on the sides of the traveler and obsessed with making the journey better.
Our results continued to be fueled by our strong network and are evidence of the power of the network effect, we spoke about in our shareholder letter as we've continued to add new nodes the value proposition increases exponentially in the second quarter, we experienced strong bookings growth of over 75%.
Some of our earliest market opened over a decade ago are amongst the fastest growing in our network, we were able to fuel our growth in a highly capital efficient manner, reflecting not only the network effect, but the obsession with customer theory.
Building, both strong word of mouth and a high N P F.
New products and innovation will further our network expansion and the continued increase in our total addressable market. We have just launched our new powered by clear verification SDK available for mobile web experiences or native mobile applications.
This low code integration creates a single absolution for our partners, enabling frictionless experiences for their customers in both digital and physical environment.
We're excited to welcome new partners to our network, creating new nodes for our over 13 million existing clear members and ensuring rapid adoption for our partners.
Since our IPO I am pleased with the continued obsession and improvement of our member experience the growth of our network, new product introductions, and our solid financial performance and free cash flow generation.
What has propelled us that clear and will continue to fuel our innovation growth and culture is a strong leadership team. We have built just this month, we are excited to welcome Nick Petty as our new Chief Technology Officer.
Nic joins us most recently from JP Morgan, where he was the CTO of payments for consumer and community banking and before that Nick was part of strong engineering culture at Uber capital, one Paypal and Amazon.
Before I turn it over to Ken a quick comment on the economic climate.
We're still early days are clear and while there is plenty of discussion in the market about a recession. Our business has not experienced any evidence of a travel or economic slowdown we have an appropriately aggressive plan in front of US is identity Holistically speaking and frictionless experiences have never been more important and we are well positioned to lead.
We're also well equipped to manage through various economic environment as evidenced by clearer financial performance during the pandemic when travel declined by almost 100% our bookings declined by about 10%, while our margins and free cash flow expanded imac.
I'm excited about the opportunities in front of us our strong free cash flow and balance sheet, which positions us incredibly well in this environment with that I will turn the call over to Ken.
Thanks, Karen and good morning, everyone. Our financial performance in Q2 was better than we expected with revenue up 86% and bookings up 76% driven by growth in clear blocks as well as new platform deals and renewals.
Karen alluded to this level of growth is not just about the return to travel post COVID-19, it's a reflection of clear significant growth opportunity our bookings CAGR versus pre Covid 2019 levels is approximately 30% with same store bookings accounting for roughly 80% of this growth.
As we discussed on our last two earnings calls our focus remains on growing members booking and free cash flow.
We generated 41 million of free cash flow this quarter, bringing year to date free cash flow to $61 million.
Last 12 months free cash flow to $114 million.
We expect Germany to be approximately $65 million payable to American express in the third quarter related to the very successful first year of our platinum partnership even with this outflow, we expect to generate positive free cash flow in the second half of 2022.
Excluding the working capital benefit from American Express over the last 12 months, we generated approximately 50 million of free cash flow, which is up over four times. The prior year LTM a mountain of about $11 6 million next.
Next quarter once we anniversary the payable to American Express will be speaking more about LTM free cash flow.
We're also focused on operating leverage since inception, we have been methodical about expense growth and we embody a scrapping at scale culture.
As previewed in our Q4 'twenty one earnings letter year over year operating expense growth will continue to moderate as we progress through 2022.
In the quarter total opex grew less than 25% roughly a third of our revenue growth rate driving significant margin expansion.
Adjusted EBITDA turned positive in Q2 and is now positive on a year to date basis. In addition, adjusted net income turned slightly positive in the quarter.
We reported 94, 3% net member retention in the quarter, which was higher than our expectations and remains above our long term expectations of the operators in our quarterly newsletter. We included some additional detail on the underlying drivers of our net retention metrics, specifically as utilization has grown with our network retention levels for newer co.
Horton members continued to improve we see that in our retention curves, which have shifted up into the right. There should provide a healthy tailwind to retention over time, which we now expect to settle above pre COVID-19 levels.
Our cash and equivalents balance as of June 30th.
$703 million as mentioned, we expect to generate additional free cash flow in the back half.
Our Q3 guidance, we expect GAAP revenue of $111 million to $113 million and total bookings of $128 million to $132 million, excluding any contribution from TSA pre check we're making good progress on our launch timeline and we do expect a Q4 launch we will now go to Q&A.
Thank you at this time all conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue for.
For participants using speaker equipment, it may be necessary to use your did you pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good morning, everyone and congratulations on the nice results I'd like you were in kind of the travel Palooza and can you expand upon how you're thinking about the travel pellucid going forward potentially into the third and fourth quarter and what you're seeing on the cohorts of membership retention.
Is it certainly seems like the year, one retention is going very nicely any other.
Qualitative thoughts on other the other year's membership in their attention and then just lastly on American Express and on TSA pre check any updates there. Thank you.
Hi, Dana so I'll take the travel to lose the concept and then I'll turn it over to Ken on retention and pre check timing and amex.
You know as I said in in my words at the beginning we continue to see very strong travel trends and expect them to continue FERC clear because these are still early days, we are opening new airports, right, which drive new enrollment and drives rich.
Tension and utilization, we're launching new products and I think it's really important never has a frictionless experience been more valuable to travelers. All you have to do is turn on any television station or you know online streaming to see how challenged the travel experience is and how people.
Back the predictable experience they have in other settings to happen in airports or in travel in general and that's what we're really focused on so whether it be home to gate, whether it be our announced partnership with Uber, whether it be our reserve products, whether it be what you know some new products that we're testing in the market that had been written about.
We're on the side of the traveler and really obsessed with their experience from the time they leave their house to the time they board their plane and I think that's deeply valuable. So we continue to see great strength and clear and the opportunities in front of us.
So I'll start with pre check pre check in.
We're progressing on the launch timeline very nicely, we still expect a Q4 launch and we're gearing up marketing and ops to support that.
On the Amex piece I don't know if you had a specific question, but as we sort of alluded to in the commentary.
Terry we were very pleased with year, one performance of the Amex partnership will.
We will be remitting, the $65 million that you called out in our free cash flow area of our.
Of our letter and we think Theres a lot of opportunity ominous Amex partnership for continued growth not only on the platinum side, but potentially adding other card portfolios within that family.
Retention.
Look we wanted to give some additional detail and some of the drivers behind the Kpis that we report.
Net member retention number.
And we are very pleased with how the cohorts are progressing typically you'll see a deck you know most companies would see a degradation over time and the quality of the joins how we see the opposite and we're really focused on.
The LTV and the LTV to CAC and the younger younger.
Younger cohorts are actually performing.
Better than our older cohorts and Thats really attributable we think to the network effect and the utilization.
Yes.
Thank you.
Thank you.
Our next question comes from the line of Paul Chung with Jpmorgan. Please proceed with your question.
Hi, Thanks for taking my question. So just on the bookings bookings strength could you kind of expand on.
Pricing uplifts, there I know you did some price increases and where are you seeing a new enrollment momentum any comments on particular regions and then.
Are there any kind of card programs or airline partnerships you should be thinking about over the next six to 12 months.
I have one follow up.
Sure. So in terms of the booking strength. It really is fairly broad based and certainly the pricing that we took in Q2 went through successfully and is a contributor to the growth.
But if you recall, we raised prices for new members only not not existing we grandfather in existing members in and so.
It is a small contributor to the bookings growth and but not all of it is fairly broad based from a geography perspective, I would echo that comment is really broad based as well the only thing I would add to that Paul is that you are you are starting to see strength on the coast and so that's something we had commented on earlier in the year.
It was coastal weakness if you will between international travel and business travel and you are starting to see strength. There. So I think that's important to think about is travel comes back both on the leisure side, but then as well as the business and international side, which have obviously been very slow to rebound.
Gotcha and then my follow up you know free cash flow has been excellent. It's already exceeding all of you know 2021 and smartly on on bookings growth, but anything else you want to point out there you mentioned the $65 million going out in <unk>, but as we look beyond <unk>, how do we think about kind of ignore them.
<unk> pace of free cash flow and does that cash outflow kind of occur every every year through two or is it kind of more spread out.
Smaller magnitude as well just any comments there.
With respect to cash out.
The cash outflow that will be.
That'll be every you know every year in Q3 for platinum.
In terms of the free cash flow profile of the company you know a couple of things to point out number one is.
As we.
Sort of repeated every quarter there is a discrepancy between GAAP and bookings so cash and GAAP.
GAAP lagged behind bookings as we grow the business and so that is a main contributor to the free cash flow generation relative to the GAAP financial metrics, but I would also point out we are hyper focused on capital efficiency is a very capital efficient business.
And we expect that to continue it's just a feature of the business.
I think it's also a feature of our culture and who we are so when you look at the you know the IPO letter that we wrote we talked about it it's how we've grown up it's how we've built the business that we believe you can have growth and free cash flow and Ken talked about scrapping at scale culture. That's embedded through now are over 3000 team members around.
The world and so it's a great business and I think we have very strong leaders, who are focused on economic efficiency as well as investing appropriately in the business and now 13 years into this that's what we've done from the beginning.
Great. Thank you.
Yeah.
Thank you. Our next question comes from the line of Michael <unk> with Wells Fargo Securities. Please proceed with your question.
Yes.
Where we were modeling it looks like it calls for continued 30% growth as a baseline you mentioned the rebounded summer travel you're seeing anything.
Anything you can add just around how to think about or how we should think about normalized growth for the business of some of the drivers there absolutely maybe reach a point, where some of the bigger spikes and ebbs and flows we've seen over the prior periods start to start to settle a bit here.
We missed the first part of your question, but I think the gist of it I think we got the gist of it which is a normalized growth rate over time and you know, we're not guiding to long term growth rates, but we did point out.
We wanted to highlight the CAGR of the business in 2019 just to show you. This is not just about the travel rebound.
This is a strong secular grower and where.
We're not going to give you guidance specifically on the long term growth rate, but we did want to point out the carriers since 2019.
Many companies are doing in this environment sure no I mean, I think the CAGR. It's helpful. Just for us in trying to model just some of the settling of impacts that could play through maybe just one more kind of if you could just.
To remind investors the relation between free cash flow and EBITDA are.
Clearly, we saw the bigger spiked a 40% margin on free cash flow this quarter anything for us to be mindful of just between and the relation between those two metrics and thinking through that.
Rectory there sure. So as a reminder, so with the subscription businesses, where an annual biller, we have GAAP revenue, which lags behind our cash receipts.
Member pays us $189 today, that's a booking of $189 for GAAP.
Implication of that is that gets amortized or deferred over the 12 month period of the subscription and so that's why you see free cash flow exceeded the GAAP metrics adjusted EBITDA, while not a GAAP metric in and of itself is based off of GAAP revenue and most of the basically all of our costs cash and GAAP are the same so we.
That is all the costs upfront.
Cash and GAAP.
While the revenues are deferred and that's why the adjusted EBITDA.
<unk> is based off of GAAP revenue and our free cash flows in excess and in terms of.
Capex, we're fairly capital efficient business and so over time as GAAP catches up to bookings those those would converge but since were.
Growing today.
That is there is that lag and therefore free cash flow was higher than than the GAAP metrics.
Thank you.
Thank you. Our next question comes from the line of Brian Essex with Goldman Sachs. Please proceed with your question.
Hi, good morning, and thank you for taking the question maybe.
Maybe for Ken or current we get a sense of.
Given the enrollment growth that we've seen on the platform I mean cross across the company.
Can you give us a sense what conversion rates might be if the non airline business and how that's driving kind of the.
See the kind of robust growth, we're seeing in the enrollment volumes. So you know if you could be at a conference or something and you're you're you're downloading the app and you're getting that participants information how are those conversion rates and how do you see the trajectory is paying.
Paying enrollments going forward based on that trajectory.
Yes, so youre, referring to the upgrade rate from the platform to clear plus and that is an exciting area for us and I think we mentioned last call. We haven't done a lot to specifically market to those folks, but we're getting very strong organic growth rates, there and we think theres a lot of opportunity there it is a.
<unk> to the growth, but not a major contributor yet.
Got it that's very helpful. And then maybe just from a Cam expect perspective, as we think about the potential of this platform the aggregate business together.
Should we think about international opportunities both on platform and cleared swaps is that something that's potentially.
Pennsylvania Horizon or is that you know kind of a ways away.
It is not a ways away I would say, it's today and on the horizon.
When we bought Y line. It was a business that had revenues in Latin America, and so not only are we expanding the reserve product to other international markets, but that is also bringing platform opportunities to those markets as well and so it is a two.
A day and on the near Horizon are not in the distant future and areas that were specifically focused on are really the Americas, so going from Canada.
Down you know Korea, South America as well as in some places in Europe Western Europe .
And it got it that's super helpful is that primarily for platform business or is that kind of on the airline side as well.
So you should think about that as the platform business, but reserve is you know aviation focus it is sooner on the platform and the reserve side than it is on the clear plus side.
Wow, that's super helpful. Thank you very much.
Yeah.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad.
Our next question comes from the line of Ananda Baruah with loop capital markets. Please proceed with your question.
Yeah. Thanks, guys. Good morning, and thanks for taking the question congrats on the consistent good results here.
I guess he had a few if I could just start Karen.
So the topic of your prepared remarks, you mentioned instead of ongoing network expansion and new product and features on the horizon is there anything there you can share with us or not.
Not specific maybe give us at least at a higher level some of the some of the some of the things you had some of the way you're thinking about getting to get some of this new stuff and I have a couple of follow ups sure. So the new powered by clear SDK that we talked about the low code integration for partners to embed clear technology in there.
User flow. So you should think about two parts of the business right. The travel side of the business and the platform side I would think of travel is owned and operated what you see a clear plus lanes or a reserve and then what you think about as the platform, which you'll see partner announcements overtime is a single app solution, so that the clear enrollment.
In verification experience can be embedded in partners' apps and so that's really a very powerful product introduction on the platform side and a significant milestone for our company. So that this frictionless experience that people have come to expect our partners can bring to their customers and so that is a.
Huge unlock for US number one and then the other thing that you might have read about right is a clear premium pilot going on in Orlando and so that's us testing different services connecting our digital assets like our app or our reserve technology with our physical assets in this case, our it's our ambassadors in airports to create <unk>.
<unk> furthering the frictionless experience, where you can go on to the App and asked for an ambassador to come meet you and truly help you go curb to gain so those are premium products. We have different assets that we can put together in different ways, whether it be for us or for our partners.
That I you know those are just two examples.
Yeah, that's really interesting and helpful.
For the the pilot that's going on in Orlando is that is that a lifestyle. It till you actually in Orlando, good could do that having a basketball shoe.
It is a life pilot that we are testing.
Okay Cool, that's that's helpful and CAD, 80%, because it's 8% same store sales growth.
Bedded in the 30% bookings CAGR.
In the past you've talked about in recent past you've talked about some of the things that you've done you got to do that continue to upgrade the talent I think he talked about moving some of the stronger general managers around the country to replicate performance.
Is there anything incremental that you have been doing over the last 90 days or so.
It could continue to help catalyze this growth are you guys sort of.
I don't want to say set with what you're doing but it isn't going to be sort of more of the same I'm. Just I'm wondering if I'm wondering if there's anything that you're doing to continue.
Test to learn to use a consistent same store same store sales I mean, yeah, we're continuing to refine our hiring practices, we're continuing to refine our training.
You know, we're continuing to refine the technology that our ambassadors.
And their app in their hands to track performance. So yeah. We continue we're a continuous improvement sort of philosophy.
And continuing to hire.
Additional training resources and management resources as we grow the business.
I think it's you know.
More more of the same but continuing to refine and improve it.
Pretty good across the board.
Okay Super helpful. And then last one for me TSA pre thanks for the update.
Are you guys thinking any differently about the contribution from TSA pre than they than you were doing the IPO process.
Or should we generally think of it as being relatively similar.
Yeah, I think it's.
It's very consistent with what we've communicated in the past, we think theres, a very large opportunity to drive new enrollments for pre check as well as renewals and.
No no change to our thought process. The only thing I would add to that is you know I think many people have enrolled through global entry historically and I think that those those appointments are even harder to come by these days and so it might create even a bigger total addressable market for pre check in.
Oh man.
Cool that's.
Helpful. Awesome. Thanks, guys. Appreciate it thank you.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Karen for any final comments.
Thank everybody for joining us today. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.